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The first quarter of 1973 marked the transition from Phase II to Phase III of the Economic Stabilization Program. Announced on January 11 by President Nixon, Phase III streamlined the operation of the Economic Stabilization Program by increasing its flexibility while at the same time retaining its essential powers.
As in earlier stages of the Stabilization Program, the continued use of direct wage and price controls under Phase III plays a supportive role in the Administration's overall anti-inflation strategy to reduce the rate of price increase by year-end. The main element in this strategy remains the balanced use of fiscal and monetary policy. For this reason, fiscal restraint-in particular holding Federal expenditures to $250 billion in the current fiscal year-is now more important than ever before. The third element in the overall anti-inflation strategy is the management of various Federal policies so that they help to constrain inflation. Included in the latter category are steps affecting federal procurement policies, transportation policies, agricultural policies, and the management of government owned stockpiles.
The Phase III Stabilization Program transition itself involved moving from a broad system of direct wage and price controls toward more reliance on self administered standards. On wages, the standards of Phase II were retained and labor and management are expected to reach settlement of collective bargaining negotiations within the framework of stabilization policies. On prices, the general rule is that increases should not exceed increases in allowable costs. Even where costs have increased, prices should not be increased if the firm's profit margin exceeds its base period margin. Alternatively, a firm would be permitted to increase prices to reflect increased costs without being subject to profit margin limitations if the firm's average price increases did not exceed 1.5 percent a year.
From the onset, mandatory controls were retained on the food, health and construction sectors, and subsequently were reimposed on major petroleum companies following industry hearings concerning supply and demand prospects.
The First Quarter 1973 Performance
The early months of Phase III were accompanied by sharp price increases, particularly in prices of retail and wholesale food. During the first quarter of 1973, the Consumer Price Index rose at an annual rate of 8.8 percent as compared to 3.2 percent in the last quarter of 1972 and 3.4 percent for 1972 as a whole. About threefourths of the overall increase in consumer prices during the first quarter of 1973 was due to increased food prices which rose at an annual rate of nearly 30 percent during that quarter. Wholesale farm and food prices also rose sharply.
Source: U. S. Department of Labor
Outside the food area, retail prices were generally moderate, rising at an annual rate of 3.2 percent in the first quarter of 1973. Over the entire stabilization period, nonfood retail prices have risen at an annual rate of 2.9 percent. Wholesale industrial prices, on the other hand, showed a substantial acceleration, rising at an annual rate of 10.2 percent in the first quarter of 1973 compared to 2.4 percent in the last quarter of 1972. The bulk of the increase in industrial wholesale prices came from the lumber, hides and leather, fuels and nonferrous metals industries. These commodities, together with farm and food items, have been a continuing problem throughout the Stabilization Program. Altogether, these commodities represent less than half of the total Wholesale Price Index, but in the first three months of 1973, they accounted for nearly 90 percent
of the overall increase in wholesale prices. In each of these industry groups, strong price increases have occurred either because of sharply increased demand, reduced supply, or both. In such instances of imbalances in supply and demand, fundamental action must be taken to restore balance-generally through policies to increase supply.
In a broader sense, the acceleration of prices in the first quarter of 1973 reflected the continued strong expansion in the domestic economy as well as a worldwide resurgence of demand for certain commodities. In the domestic economy, Gross National Product in the first quarter of 1973 increased at an annual rate of $43 billion dollars or 15.2 percent. The number of civilians employed rose by 600,000 during the quarter, bringing the total increase in employment over the year ending in March to 2.6 million. Real per capita disposable income continued to rise, reaching a record $2,882 in the first quarter, up from $2,851 in the fourth quarter of 1972.
This strong growth in output brought a number of industries closer to full utilization of their capacity. Thus the strong pace of economic growth, while continuing to make fuller utilization of our labor resources, does hold the threat of broader inflationary pres
Note: Adjusted for overtime (manufacturing only) and for interindustry employment shifts
Source: U. S. Department of Labor